I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I started following stocks in 1981 when I was in grad school at MIT and started analyzing tech stocks as a guest on CNBC in 1998. I became a Forbes contributor in April 2011. My 11th book is "Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision" (http://goo.gl/ygaUV). I also teach business strategy and entrepreneurship at Babson College in Wellesley, Mass.

Why Groupon Is Over and Facebook And Twitter Should Follow

Investors are giving up on Groupon (GRPN) and they’re scrambling for the exits on Facebook (FB) too. Since Twitter is not publicly traded, they can’t get out of that one as quickly.

But social media attracts consumers because of dopamine — and like any drug — those consumers need a bigger dose to get the same effect. Social media’s inability to deliver that is at the root of what makes it hard for it to grow into its lofty valuations. Not only that, but it’s failing to come up with compelling ways to earn a return on spending to turn those consumers into repeat customers.

The list of investors getting out of Groupon shares contains prominent names. They include Andreessen Horowitz, Hedge fund Maverick Capital Ltd., and Fidelity Management & Research Co, according to the Wall Street Journal. Others like Kleiner Perkins Caufield & Byers and Morgan Stanley (MS) are bullish on Groupon, reports the Journal.

Groupon and the whole daily deal business are under pressure because so many participants offer a money-losing proposition to merchants. In June 2011, I wrote that the SEC should spare investors the agony of losing their money when Groupon sold its shares to the public. The SEC did not listen to me (no surprise there); Groupon went public in November 2011, and that day’s Groupon stock buyers are now 82% poorer.

But Groupon’s biggest victims are the small businesses that get suckered in to accepting Groupons. Restaurants lose money on them because consumers flood the restaurants, order very low priced meals, strain waiters and cooks, get lousy service, and never return.

Examples abound. As I wrote in June 2011, a restaurant in Portland, Ore. believes its decision to work with Groupon was its worst business decision ever – costing it $8,000. And according to the New York Times, Muddy’s Coffeehouse –it serves coffee and granola – had to take out a loan to cover its Groupon losses.

Muddy’s gave Groupon customers $24 worth of food and coffee for $12. It paid Groupon half of its revenues, drew in crowds, lost money, and would have shut down were it not for that loan. As owner, Dyer Price, told the Times, “They don’t warn you that you’re going to get hit really hard and that you have to be prepared. We will never, ever do it again.”

Customers and daily deal providers are bolting. UnsubscribeDeals.com — it unsubscribes people from daily deal e-mails – got 7,800 unsubscribers in its first three months and doubled in July, reported the Times. Daily Deal Media reported that in the last six months of 2011, 798 daily deal sites shut down.

I interviewed Ben Edelman, a professor at Harvard Business School, about this. He pointed out there are good daily deal sites. For example, Restaurant.com has been around for over a decade because it creates value for restaurants and consumers. “Restaurants like the fact that it does not require them to pay for the daily deal and that it lets them add restrictions to push business towards slow nights,” said Edelman. By contrast, Groupon tends to disallow such restrictions.

And Edelman believes that while consumers might initially be frustrated that they can’t get the discount on Saturday, the value they’re getting is sufficient that they might be quite happy to try the restaurant on a Thursday. They will likely get better service and perhaps consider coming back to pay full fare in the future.

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Unlike Groupon, Facebook and twitter have a product, they have a role, Groupon is only selling a fake dream about having a nice evening at 51% discount with the same service than full price … The daily Deal is not a long term business, it’s not really profitable, and it should never been introduced public …

In china the big DD leader is “Lashou.com” we know how fabulous is the china’s grouwth right ? Well, take a look at the website frequentation : http://www.alexa.com/siteinfo/changshaxian.lashou.com

Let’s have a look at the Groupon in China called “gaopeng.com” : http://www.alexa.com/siteinfo/gaopeng.com

Worldwide the DD is dying, giant’s are sinking, ans starters have almost all disapeared … Why ? This should happens when the business is profitable ?

… Or maybe, this happens when the business don’t create wealth …

Groupon may become a wealth company if they change entirely there core business, a succesfull 180° turn over is always possible, but almost impossible … Sorry for the poor shareholders who have been crooped by that IPO.

This is the same story all over again and investors don’t learn. When sophisticated investors are excited to sell you their stock it means they probably get a very good price for it and you are paying.

Just look at history and the facts to see that buying in IPOs is not always the best option. Let those companies develop a track record as public companies for few quarters before investing. The sophisticated investors you are buying from are constantly measuring and mapping their results as explained in this blog – Trousers and Sunsets Don’t Lie – http://rsilberman.com/?p=402. It’s time for the individual investors to do the same.

Lumping twitter in with Facebook and Groupon seems a bit short-sighted. Twitter’s usefulness for brand awareness, customer support, and direct engagement with customers makes it an essential part of most startup’s business operations – something Facebook lacks. But I agree with your dopamine assessment of Facebook, the service has been stagnant for a while now.

I think that ultimately the value proposition is at work here. It was around just long enough for people to realize that quantity will never replace quality. Both in terms of the function of the site and the value to investors. Zillions of users do not mean zillions of qualified interested engaged potential buyers. All Face book has really ever been is just virtual masturbation for the pot and pimple creme crowd. A superficial circle jerk for people that failed to have deeper more meaningful relationships in real time.

The real winners, the ones with a personality, self worth, a few quarters in their jeans, are not sitting at home Saturday night trolling the also ran friends for some kind of socio psychological primordial release. They are engaged in life. And Facebook is not speaking to them. It is facing to the losers who traded in the capital L emblazoned on their forehead and replaced it with a large FB

Well that is an arrogant, insulting, and crass view to take. There are a wide variety of people on Facebook and people use it for all sorts of different reasons. It’s a nice way to keep in touch with friends or family who are a distance away. It’s easier to share photos with people by simply creating a Facebook album. I know people who use Facebook as a platform for sharing their politics or other causes they’re interested in. Just because someone uses Facebook doesn’t mean they spend all day every day on it.

Facebook can be useful for keeping up with not-so-close friends, seeing what they are doing, liking or commenting…people who aren’t emailing me frequently and often live pretty far away — J-Burg, HK, Bahrain, for example. One in each place, but we don’t naturally see each other more than once every couple of years, at best. That said, I am thinking of moving to Google+ and eventually dropping Facebook because it has too many people on it and so it takes longer to scroll through. Have seen others announce they are moving to Google+ so they can start fresh.

You are missing an important part of the picture: Advertising. Any business that wants to grow needs to bring in new faces, customers who didn’t know they’d like the product. Many businesses can purchase ads on radio, television, or the web, but this money essentially guarantees 0 customers. You could advertise the wrong way, or on the wrong medium, and you’re just out the $5,000 in advertising, with nothing to show for it and no new interest.

Now contrast this with a Groupon; sure, some businesses may be taking a loss (their own fault, really; many groupons can still be done with a slight profit or at cost), but they’re getting new people through their doors that would not have been otherwise. Because of Groupon, I’ve been to restaurants I never would have been to otherwise, taken classes (like Glass Blowing) that I never would have found out about. In the case of Glass Blowing, I then went back and paid retail price for work time and supplies. The bottom line is that the businesses that used Groupon made me shell out money that I would not have spent with them otherwise.

Now, for the additional value: I tell my friends. It’s not a story if I just went to a restaurant or took a class or got a massage, but it IS when I got a good deal on it and mention them by name! Viewed in this context, Groupons may be rough for some business owners up front, but if they can work through the rush of new clientele and treat these new customers right will be even more successful after word of mouth spreads to the hundreds or thousands of new customers. I’ve had a few places that were snobby about my Groupon because they weren’t prepared for them, and I won’t be going back or recommending them.